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Smart Questions (and Some Answers) About Community Banking

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Does scale matter to a community bank? What does the disappearance of black-owned banks mean to the communities they served? What impact has regulation had on banking? Those questions were among the many addressed by researchers at the recent community banking conference in St. Louis hosted by the Federal Reserve and Conference of State Bank Supervisors.

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Research from the Italian Bankers Association looked at whether traditional banking models can survive by examining what went right during the financial crisis. The verdict? Banks that stayed true to traditional banking increased their survival probability by 13 percentage points.

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Another group looked at what would happen in Missouri, the conference's host state, if all its banks stopped making commercial and agricultural loans for a year. Under that scenario, employment would fall by 5% and output would decline significantly.

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A group from the University of Wisconsin noted that the number of black-owned banks has been halved in the last 15 years, to 20 institutions. In many instances, the closed institution was the only bank in a particular ZIP code, creating banking "deserts." The researchers urged attendees to find ways to serve those markets.

Bigger May Be Better  Then Again Adobe Stock Bigger May Be Better Then Again

Several papers looked at the relationship between asset size and performance. One presentation noted that banks get more efficient with size, likely due to the fixed costs of compliance and technology. Another paper discovered diminishing returns in terms of ROA as banks grow; once financial institutions hit $2.5 billion of assets, returns begin to flatten.

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Community banks benefited from Dodd-Frank's shift in assessing deposit insurance fees to the tune of $744 million in 2011, researchers found. However, another team determined that when the government imposed higher capital requirements in 1905 yes, the researchers went back that far they were ineffective in promoting bank stability.

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The conference's annual community banker survey found that more institutions are willing to make mortgage loans, but they believe the know-before-you-owe rules are significantly delaying closings. Several bankers said they are worried that regulators reacting to increased exposure to commercial real estate could impose new rules that might force them to scale back lending.

Does scale matter to a community bank? What does the disappearance of black-owned banks mean to the communities they served? What impact has regulation had on banking? Those questions were among the many addressed by researchers at the recent community banking conference in St. Louis hosted by the Federal Reserve and Conference of State Bank Supervisors.

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